Private equity's role in the Dick Smith saga hardly serves the public interest

By Alex Malley

No matter which way you look at it, the process of flipping a business in 12 months and making $500 million while putting 3300 jobs on the line doesn’t feel right. It might be legal but that doesn’t always mean it is right. There’s an ethical gulf which deserves community discussion.

Dick Smith electronics stores have been through a private equity "transformation" process. Starting out as stores for electronics geeks, the real Dick Smith sold his business to Woolworths who promptly turned it into something different – a general consumer electronics store which ultimately struggled in an ultra-competitive and rapidly changing retail market.

At the end of 2012 the business was identified as a “turnaround opportunity” by a private equity firm. While the sale price was $115 million, they only paid somewhere between $10-20 million with their own money, depending on which reports you believe.

What this means, in general terms, is that private equity firms often use the full range of accounting policies and valuation techniques available to them to dress up a business to look as appealing as it possibly can for a share market listing. Mutton dressed up as lamb, and exit as quickly as possible. In the case of Dick Smith, the IPO was successfully completed at the end of 2013. The investment of $20 million turned into a business with a market capitalisation of $520 million.

The collapse of Dick Smith has threatened 3300 jobs in Australia and New Zealand.

Photo: Edwina Pickles

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And here we are two years later – the business in administration, gift cards not being honoured and 3300 jobs around Australia and New Zealand in peril. For the families behind each of those jobs, this is a personal catastrophe. It’s also terrible news for the investors.

I understand that private equity firms have every right to do what they do – find distressed assets, transform them, and maximise returns for their investors. It would also appear that they complied with all the requirements for a share market float.

In circumstances like this there are many players involved in addition to the private equity firm. In this case, there’s the original owner, Woolworths and conjecture around their level of interest in the business. There is also the board and executive management of the listed entity with questions around the effectiveness with which they ran the business. There are the banks, with some speculating that they may have moved in too quickly. When you consider that there’s no compulsion to buy shares in a float, investors, both institutional and those who advise mums and dads, also had a role to play.

Yet it’s hard to get away from the sour taste the whole episode leaves in the mouth. It’s these sorts of events that undermine public trust in the mechanics of the business community, and I say this in the full knowledge that some of those involved are members of the accounting profession, including our own body.

For its part, the accounting profession is actually bound by a code of ethics which requires that accountants act in the public interest. In fact, public interest sits above all else. It trumps shareholder primacy. It means a member’s responsibility is not exclusively to satisfy the needs of an individual client or employer.

We have this code because it is possible to follow all the rules, but still undermine the principle or the spirit of the rules. You can make choices about how to treat inventory and other accounting assumptions to paint a certain picture of the health of an entity. It is in making these choices where the code comes into its own -- it’s something to rely on when you get caught up in designing complicated tax structures and compiling statements of financial position, income and cash flows.

A commitment to public interest and ethical conduct can keep you on the ethical side of a loophole. There’s no doubt in my mind that keeping 3300 Australians and New Zealanders employed in a sustainable business is in the public interest.

Across the board, the accounting profession adds immeasurable value to business and the community in general. Our expertise, experience and professionalism as strategic advisers is highly valued because it is trusted. So as uncomfortable as it may be to call out instances where there is even the perception we may have fallen short of expectations, our fierce commitment to the public interest demands that we do so.